The markets were kind of dead to me, today, with no real spectacular volume in the triggering stocks on my watchlist. So, I decided to play more with the box play. It’s a pretty fun and easy-going setup to use, I’m discovering. It can take a bit of looking, on a lot of time frames, to find a decent setup in time, though. This is one I found off the 1-minute charts, making it more of a scalp than anything else. The stock was Thornburg Mortgage Inc (NYSE: TMA).
The Setup
Dow stocks were rising, and the NYSE TRIN was declining. TMA had gapped up strong in the morning, and trade-ideas indicated it was doing more than 5 times its normal volume. In the afternoon, it had flattened into a flat cup-like formation. Here’s the 10 minute chart just before I made my trade (complete with Scottrade’s patented “missing chart data” feature… see those two candles that are just a flat line? yuck…):
… I didn’t know if it was strong enough to make new highs, but I wanted to scalp the run up to test the highs. That’s why I was glad the one-minute charts set up with a box play.
Entry Criteria and Trade
I saw the box form on the 1-minute charts:
- A local low is formed at 25.70. I draw a lower line.
- The stock runs up to a high of 25.78. I draw an upper line.
- The stock reverses back down to 25.70. This is an exact touch of the lower line. Perfect.
- It runs back up to 25.78. This confirms the box boundaries. To enable the trade, the price has to run at least 25% back into the box before breaking out. In the book, the trade allows you to trade a breakout in either direction. For this play, I was only looking to go long.
- The stock breaks out to the upside, after dipping to the middle of the box. This kind of half-reversal is a fairly textbook way for a stock to break out of congestion, so I was glad to see it. I buy, and my initial stop loss goes at the lower line, at 25.70. My profit target is the same height as the box, or 25.86.
Profit target was hit about 25 minutes later, which is longer than I expected. You can see on a one minute chart that it broke out in a pretty messy up/down/up fashion, but it never dipped back below 25.775, which made the trade easy to stick with. I kept my eye on the TICK and the TRIN for warning signs, but otherwise waited for my target.
To read about this play and several others, check out the “Mastering the Trade” book. I first read it before going pro, and I flipped through it again last night. I think it’s worth a second read, now that I have a lot more trading experience. A lot of the good trading books are that way, I’m finding.
| Stocks Mentioned In This Article | |
|---|---|
| Stock | Links |
| TMA |  |  |  |
January 24th, 2007 at 2:53 pm
You should read some books by Dick Arms.
January 24th, 2007 at 3:19 pm
@pete: do you have a favorite?
January 24th, 2007 at 5:53 pm
@Richard: Does the box play and the 1R target work on any timeframe?
January 24th, 2007 at 6:09 pm
I haven’t been using it on all timeframes, but I first read about it in a book on daily chart patterns. That book says you can also play them on the other side when the breakout fails.
Not as sure about the 1R thing… when I play it on 5min or 1min charts, and am looking for 8 to 50 cents, then I feel pretty good about it. If I played it off weekly charts, maybe I’d want more than my risk back. Best thing to do is look for examples and see how they seem to perform.
January 24th, 2007 at 6:11 pm
Also, what was your entry point? 0.01 above the box high, or exactly at the high? With a narrow box like today, a penny or two on each end drops your R:R to 0.85 or less…
January 24th, 2007 at 6:17 pm
Yeah, the trigger for me is one cent over, at 79. As it happens, this stock moved slowly enough that I was able to get filled at .78. So, I set my target to .86 (8 cent stop and 8 cent target). Had I been filled at .79, I’d have set my target at .88 (9 cent stop and 9 cent target). This range was ridiculously narrow, and if it hadn’t taken so much time to run, I probably would have held half my position to see if we could re-test the HOD. After 25 minutes, though, I was ready to be out.